Regional Consumer Monthly. Buns & Butter. Strategy, 22 September Self-checkout in Singapore supermarkets

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1 Strategy, 22 September 2015 Regional Consumer Monthly Buns & Butter Self-checkout in Singapore supermarkets We launch our inaugural issue of Buns & Butter, a regional consumer monthly that aims to help investors keep up with our latest on-theground research, model portfolio, research recommendations and new developments shaping consumer spending across Asia. Eighth Singapore Formula 1 Grand Prix The Undercover Shopper self-checkout. Self-checkout counters in supermarkets are becoming increasingly prominent in Singapore, as part of the Singaporean Government s push towards higher productivity in the retail sector. James Koh checks out three supermarkets over the weekend and comes away with the observation that self-checkout currently may already yield 25% cashier staff wage cost savings. We expect more supermarkets to adopt this format over the next 12 months. RHB Consumer Team James Koh Head, Regional Consumer james.koh@rhbgroup.com Robin Yuen Hong Kong (Apparel, Dairy) robin.yuen@rhbgroup.com Andrey Wijaya Indonesia (Auto, Cement, Consumer) andrey.wijaya@rhbgroup.com Herman Tjahjadi Indonesia (Retail, Healthcare) herman.tjahjadi@rhbgroup.com Vatcharut Vacharawongsith Thailand (Consumer, Hospitality) vatcharut.va@rhbgroup.com Model portfolio tracking our recommendations. We start the RHB Asia Consumer Model Portfolio as a way to track our research recommendations more meaningfully. After all, there are BUYs and there are Must Buys, for which timing must also be taken into account. This week, we add BreadTalk (BREAD SP, BUY, TP: SGD1.90), Sheng Siong (SSG SP, BUY, TP: SGD1.00) and Nippon Indosari (ROTI IJ, BUY, TP: IDR1,175) as we dip cautiously into the market. Fads and trends Singapore Formula 1 Grand Prix. We were at the eighth Singapore Formula 1 Grand Prix (18-20 Sep 2015), which went ahead despite initial worries about the haze. While still a major attraction, it can be said that the initial buzz amongst residents has declined over the years since its inception in Ticket sales remain steady, however, and we observe that >80% of attendants now appear to be tourists. Anecdotally, the Singapore Grand Prix has been a runaway success in terms of promoting Singapore to potential tourists and foreign talent alike. Man vs machine - observations over a 20-minute period on a Saturday Customers Served Cashier Self-Check Venue Time NTUC Finest 21 8 Bedok Mall 4pm, Sat Giant Hyper 16 7 Parkway Parade 3pm, Sat Sheng Siong Segar Rd 2pm, Sat Philip Wong Malaysia (Consumer) philip.wong@rhbgroup.com See important disclosures at the end of this report Powered by EFA TM Platform 1

2 Regional Outlook 22 September 2015 The Undercover Shopper Self-Checkout Government is providing incentives to supermarket operators in Singapore First introduced in Singapore in 2003 to limited success. While self-checkout counters are commonplace in countries such as Australia, it is still a relatively new concept in ASEAN. This is largely a function of the availability of low-cost workers, in our view. In Singapore, this was first introduced by Cold Storage in 2003 to limited success. It then gained some traction when market leader NTUC FairPrice introduced them in In the last 12 months, the Government has stepped up its drive to improve productivity in the retail sector by offering incentives and subsidies to supermarket operators for automation. We observe that the number of stores offering this has increased significantly over the last 12 months and, importantly, more people are using these machines. We observed self-checkout counters at three different stores over a period of 20 minutes We checked out three stores over the weekend. All the major supermarket operators in Singapore NTUC FairPrice, Cold Storage, Giant and Sheng Siong now have self-checkout facilities, although not in all stores. Sheng Siong was the last to join in the fray and targets to increase its stores with self-checkout to seven from just one by the end of For our investigation, we observed three stores during peak hours where active aisles were utilised almost fully and observed the number of customers served at one cashier and one self-checkout counter during the period. Figure 1: Giant Hyper at Parkway Parade: Saturday at 3pm Figure 1: Giant Hyper s self-checkout machine Figure 2: Sheng Siong at Segar Road, Saturday at 2pm Figure 3: Sheng Siong s self-checkout machine See important disclosures at the end of this report 2

3 Regional Outlook 22 September 2015 Figure 4: NTUC Finest at Bedok Mall, Saturday at 4pm Figure 5: NTUC Finest s self-checkout machine Cash payments are only available at Sheng Siong NTUC FairPrice and Giant use full self-checkout systems while Sheng Siong uses a hybrid. NTUC FairPrice and Giant have full self-checkout systems, whereby the shopper scans, pays and packs their own items. The facility that allows shoppers to pay by cash was not available. Sheng Siong, on the other hand, still requires a cashier to scan and pack, and the shopper receives a coupon which indicates the price and self-checkout counter to pay at (via either cash or card). In all three stores, one assistant was in place to monitor and assist across the self-checkout machines. Figure 6: We observed one self-checkout and cashier counter each over the same 20 minutes Customers Served Cashier Self- Check Total Active Remarks Venue Time NTUC Finest cashiers, 4 self-check, 1 helper Self checkout limited to 1 basket Bedok Mall Sat, 4pm Giant Hyper Cashiers, 6 Self-Check, 1 helper Customers more reluctant to use selfcheck Parkway Parade Sat 3pm Sheng Siong cashier, 7 self-check with 1 scanner and 1 helper Hybrid system, customers more willing to go selfcheck Segar Rd Sat 2pm Machines do not fall sick and can work 24 hours a day, seven days a week 1 cashier = 2.5 machines. Based on our observation, one full self-checkout machine can serve the equivalent of 40% of a cashier counter at the moment. Assuming each machine costs SGD25,000 (not taking into account government incentives), then grocers utilising a self-checkout system may book a 25% cost savings, in our estimate. Manual labour is still the bottleneck in Sheng Siong s case. In the case of Sheng Siong s hybrid system, the cashiers still scan and pack, but as they no longer need to collect payment, they can serve customers 25% faster. This efficiency, however, is mostly negated by the cost of the higher number of self-checkout machines and the additional staff assisting customers. We believe Sheng Siong may have to fine-tune its system, which is still in the early stages, to achieve greater efficiency. On the other hand, the company s system is the least disruptive to customers experience and, accordingly, consumers are less reluctant to check out at these new counters. See important disclosures at the end of this report 3

4 Regional Outlook 22 September 2015 Figure 7: Case analysis for cost savings SGD Annual Cost 2x shifts of 8 hours Extra Assistant Total Adjusted for effiency NTUC/ Giant full self checkout (1 for 5 self checkout) Self-checkout is 40% of cashier Cashier (adjusted for 7-day work week) 25,000 50, ,000 50,000 Self-checkout (depreciated over 5 years) 5,000 5,000 10,000 15,000 37,500 Cost Savings 25% SGD Annual Cost 2x shifts of 8 hours Extra Assistant Total Adjusted for effiency Sheng Siong's hybrid (1 for 7 self checkout) Cashier+Selfcheckout is 25% faster Cashier (adjusted for 7-day work week) 25,000 50, ,000 50,000 Cashier + self checkouts (3.5 machines to 1 cashier) 42,500 67,500 7,000 74,500 59,600 Cost Savings Note: We assume SGD25,000 for each self-checkout machine. Cashiers annual costs include CPF contributions, bonuses and human resource benefits Nil A good solution for wage inflation and shortage of manpower. In an environment of wage inflation and shortage of manpower, the case will tilt even further towards using a self-checkout method. This would benefit supermarket operators in our view, which can either achieve better margins or pass on cost savings to consumers. Currently, we estimate that cashier wages may account for more than 25% of total operating expenses for a supermarket operator. See important disclosures at the end of this report 4

5 Regional Outlook 22 September 2015 Model Portfolio Adding In BreadTalk Real-time tracking through Bloomberg s TMSG function Starting our Consumer Model Portfolio. We start a consumer model portfolio, partly as a way to track our research recommendations more meaningfully. The RHB Asia Consumer Fund is conceived as a close-ended USD20m portfolio, which will invest in consumer-related stocks. We will track the performance of this fund primarily through Bloomberg s TMSG function (please let our team know if you would like to have access to view this in real time), which helps take into account transaction cost and liquidity issues, as well as through our Buns & Butter monthly update. Mostly long positions Fund strategy. The fund would mainly take long positions (generally 6-12 months), although we may also occasionally take conviction short positions in more liquid names. Our benchmark is the MSCI Emerging Market Index as well as the STI. Our positions are not limited to the RHB Research universe, although we would give the stocks in our coverage priority. Expect weak consumer sentiment Investing in BreadTalk, Sheng Siong and Nippon Indosari. We expect consumer sentiment in the region to remain weak and prefer to invest in companies which tap on staple spending. We believe BreadTalk is significantly undervalued, while it has a strong regional retail network and brand presence. With a stronger focus on achieving margin growth, we are expecting net profit CAGR of 15% over the next three years, as depreciation expenses moderates. In particular, we expect the restaurant division to grow fastest, driven by ongoing popularity of its Din Tai Fung restaurants in Singapore. The stock is trading at less than 5x FY16 EV/ EBITDA. Sheng Siong historically has outperformed when the economic environment weakens, as consumers look for more value. We believe stores sales will remain resilient. Weakening Ringgit will reduce cost of fresh products and improve margins. Growth upside could come from expansion of stores this year as weaker tenants move out of retail locations. At the current price, we are expecting dividend yield of >4%. Finally in Indonesia, Nippon Indosari, with more than a 80% market share of the packaged bread market, benefits from high barriers to entry. We expect its sales volume to remain resilient and pricing power to stay intact. For 1H15, sales growth of 13% YoY has been driven mainly by volumes. The company is looking into expanding its product range, by tapping into its existing distribution network. The stock is trading at 20x FY16F. Figure 9: RHB s Asia Consumer Model Portfolio Price per Share (Lc Currency) Market Value (USD) USD % Change Stock BB Code Date Quantity Cost Previous Last Cost Previous Last Unrealised Profit/ (Loss) MoM Breadtalk BREAD SP 21/9/ Sheng Siong SSG SP 21/9/ Nippon Indosari ROTI IJ 21/9/2015 1,170 1,170 1,170 1,196,876 1,659,107 12,189,028 1,000,000 1,000,000 1,000, % 0.0% 1,000,000 1,000,000 1,000, % 0.0% 1,000,000 1,000,000 1,000, % 0.0% Cash (Realised) ,000,000 17,000,000 17,000, % of Cash holding 85.0% Total (With realised and unrealised gains since Sep 2015) 20,000,000 20,000,000 20,000, % 0.0% Note: Numbers are estimates of figures captured in Bloomberg s TMSG and may be slightly different next month to reflect actual numbers captured. Source: Bloomberg, RHB See important disclosures at the end of this report 5

6 Regional Outlook 22 September 2015 Fads And Trends: Singapore Formula 1 Grand Prix This is the eighth edition of the Singapore Grand Prix Went ahead despite haze concerns. We were at the eighth Singapore Formula 1 Grand Prix (18-20 Sep), which went ahead despite initial worries about the haze. Ticket sales continued to be solid, though it could be observed that the buzz amongst locals has declined over the years after being introduced in The event itself does not seem to be a major point of conversation. Ticket sales held steady after inaugural event in 2008 Stable ticket sales, but with fewer locals buying. Ticket sales have held relatively steady over the years (it recorded a small decline in 2014) since the inaugural event when ticket sales hit a high of more than 100,000. While 2015 figures were not announced, organisers said in August that early estimates showed an 11% YoY growth. In our observation, however, more than 80% of the event-goers appeared to be non-residents. This suggests that local attendance has declined as the novelty wore off, but the strong international fan base of the sport implies that tourists continue to flock to the Singapore Formula 1 Grand Prix event every year. Figure 10: Singapore Formula 1 Grand Prix ticket sales over the years Figure 81: Singapore Formula 1 Grand Prix during practice rounds on 18 Sep. Singapore Airlines is a new sponsor this year Source: Singapore GP, RHB estimates Positive impact on tourism as well as attracting foreign talent Impactful marketing tool for Singapore Inc. However, we firmly believe that the F1 Grand Prix has huge intangible benefits for Singapore as a major marketing tool. More than a few foreigners we know have spoken of the spectacular night skyline they saw on TV as their first positive impression of Singapore. This resulted in them wanting to either visit Singapore or consider relocating to the island nation to work. Singapore corporations also have a chance to promote their brands. This year, Singapore Airlines (SIA SP, NR) replaced Singtel (ST SP, NEUTRAL, TP: SGD4.07) as the title sponsor. Direct impact is small No major direct benefit on tourism. We believe the actual direct impact from the motorsports event on tourism is minor, as the 80,000-odd tickets may represent a small fraction of overall tourist arrivals to Singapore (more than 15m in 2014). However, the event serves as an impactful marketing tool for potential tourist arrivals, which has crept up steadily over the years. See important disclosures at the end of this report 6

7 Regional Outlook 22 September 2015 Figure 9: Tourist arrivals. Formula 1 (held in September each year) does not have a significant direct impact on tourist arrivals Figure 10: Hotel occupancy rates in Singapore % 86% 84% 82% 80% 78% 76% 74% 72% 70% 68% 66% Annual average Sep Annual average Sep Source: Singapore Tourism Board, RHB Source: Singapore Tourism Board, RHB Kingsmen Creatives benefits from Formula 1 contracts. Among the stocks in our coverage universe, one of the direct beneficiaries would be Kingsmen Creatives (KMEN SP, SELL, TP: SGD0.78), which won a SGD31m contract in 2013 for five jobs involving the fabrication, construction of grandstand seats and interior fit-out works at the Paddock Club. However, this accounted for less than 1% of the company s revenue and was not significant to its profit growth. Figure 114: Kingsmen Creatives is involved in various works including fabrication and installation of seats and fit-out works (such as below) See important disclosures at the end of this report 7

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